The Bait and Switch The Federal Communications Commission (“FCC”) has an admirable and often-stated goal of increasing ethnic diversity in ownership of broadcast stations and ensuring that a broad diversity of voices and viewpoints are delivered on the public airwaves. Nexstar pretended to support this objective by partnering with Marshall Broadcasting Group (“MBG”) to … Read more Nexstar sued by MBG

Marshall Broadcasting Group (MBG), which is owned by Pluria Marshall, has filed suitagainst Nexstar Broadcasting in the New York State Supreme Court.

Allegations in the nine-count suit include Breach of Contract and fraudulent misrepresentation.

“The allegations made by MBG in its lawsuit against the company are spurious and without merit,” said Nexstar in a statement. “The company intends to vigorously defend itself regarding this matter in a court of law.”

Law360 (April 5, 2019, 9:10 PM EDT) — Sinclair Broadcast Group’s bid to acquire Tribune crashed and burned before the FCClast summer, but Nexstar’s effort to become buyer No. 2 is widely believed to face fewer hurdles even though it comes with baggage of its own.

Nexstar’s offer has been expected to face a much easier path than Sinclair because it will be aided by a perception that it is less political than Tribune Media Co.’s former suitor and is less likely to generate animosity from outside parties — although a new lawsuit may foreshadow other obstacles.

Sinclair lost its chance to buy Tribune last summer after the FCC suggested it hadn’t been candid in divestiture arrangements it proposed to comply with FCC media ownership limits. While an in-house judge eventually cleared Sinclair of wrongdoing, some attorneys suggest that Nexstar will benefit from less heated rhetoric as well as a more defined blueprint for success.

“Nexstar seems to be playing a great corporate citizen,” said Morrison Cohen LLP partner David Scharf. “And I think regulators like to reward that type of above-board, clear, clean conduct.”

So far, Nexstar has reached deals to sell 19 TV stations totaling $1.32 billion to resolve regulators’ antitrust concerns with the $6.4 billion deal, which was first unveiled in December. Nexstar’s CEO has said that the Tribune deal was only announced after developing “comprehensive regulatory compliance” and integration plans.

Sinclair had been criticized by liberal groups and opponents of media consolidation for pushing conservative-slanted “must-run” political segments onto local stations. Many of its critics also suspected the broadcaster was planning to use the Tribune buy as a way to challenge the ranking of News Corp.’s Fox Network atop the pantheon of nationwide conservative news outlets.

In contrast, Nexstar’s bid may be more palatable to the FCC because its business model has fewer political connotations.

“Less polarizing in this current political climate is always going to be welcome,” Scharf said. “It keeps the pressure points of people who are interacting with the FCC or DOJ from not having to grind political capital they may have … That makes a regulatory approval process simpler, when you’re not getting the phone calls and being called to the Hill or called to the Oval to discuss what’s happening.”

Indeed, the Sinclair deal became problematic for the FCC when questions arose about whether the White House had pressured the ostensibly independent FCC and U.S. Department of Justice to approve the deal. FCC Chairman Ajit Pai was even investigated — but eventually cleared — by the agency’s inspector general over whether he made rule changes to benefit Sinclair.

When the FCC announced it would designate the deal for review by its in-house judge, President Donald Trump fueled suspicion by tweeting that the FCC’s move was “sad and unfair” because the combination would’ve boosted “a great and much needed Conservative voice.”

Not long after, Tribune sued Sinclair for tanking the deal. In its lawsuit, Tribune alleged that Sinclair employed aggressive negotiation tactics at both the FCC and the DOJ to defend divestiture proposals that government officials were sure to reject.

“Nexstar has the advantage of the failed Sinclair process, meaning if you understand how and why they failed, they can avoid the pitfalls,” Scharf said.

This time around, Nexstar must diligently lay the groundwork to craft a proposal the FCC will feel invested in, said Francisco R. Montero, a Fletcher Heald & Hildreth PLC attorney and former FCC official.

For Sinclair, the kiss of death had been the assertion that the broadcaster hadn’t revealed it would effectively retain control of three divested stations even after repeated warnings. A successful party would instead build FCC staffers’ advice into its amended proposals and demonstrate it’s taking agency divestiture demands seriously, Montero said.

“It’s OK to be a little aggressive and push back a little bit, but you have to work collaboratively,” Montero said. “At the end of the day, you want buy-in from commission staff.”

To Scharf, this work ethic has been apparent in Nexstar’s merger documents at the FCC. The broadcaster has already been forthcoming about one market in which it would own too many top-four stations if the acquisition is approved, and it pitched a sale structure to allay those concerns, he said. The company further clarified to the FCC that it would operate other duopoly combinations from Tribune but that no new combinations would be struck.

“They recognized where the FCC was going to look and what the FCC regulations were going to require them to do,” he said.

However, Nexstar ran into a speed bump Wednesday, when a minority-owned broadcaster sued with claims that the media behemoth used a sale of three TV stations to curry favor with federal regulators in 2014 before it gutted the businesses, hoping to buy them back cheaply.

The lawsuit came “out of nowhere” and could draw scrutiny to Nexstar’s prior transaction record as well as its current plans, said policy strategist David Goodfriend. “That’s a new development that casts a little bit of a question over this merger,” he said.

For example, the 19 spun-off stations would go to two major broadcasters — Tegna Inc. and E.W. Scripps Co. — instead of giving smaller broadcasters a shot at expanding, he said.

“It doesn’t really add to media diversity,” Goodfriend said. “The optics of that are not good.”

It’s also a concern that Nexstar announced the details of its divestiture plan within a couple days of a March 18 deadline for filingpetitions to deny the merger, according to Goodfriend, whose group Sports Fans Coalition opposes the deal. This could suggest either that the merger plan isn’t airtight or that the parties are trying to “obfuscate what’s going on,” he said.

“That should’ve pushed back the deadline for those petitions. It should’ve given everybody more time to consider the divestitures, and it made me think they’re hiding something,” Goodfriend said.

While Nexstar may enjoy an advantage of a less charged regulatory environment, former Democratic FCC Commissioner Michael Copps said the size and scope of Nexstar-Tribune is very similar to that of Sinclair-Tribune, warranting careful and independent consideration.

“Sinclair attracted more media attention, I guess, because of the arguments over political preferences,” Copps said. “But they’re very similar kinds of things when you get to the bottom line.”

Ultimately, the FCC’s job is to independently evaluate whether any transaction serves the public interest, and that may yet be a high bar for Nexstar to meet.

“I don’t see that Nexstar has come anywhere near to doing that,” Copps said.

Nexstar sued by minority-owned Marshall Broadcasting Group for Sabotage Efforts

Deal designed to curry favor with FCC and Congress, but undermined Marshall Broadcasting Group’s prospects

Houston, April 3, 2019 – Since selling three television stations to Marshall Broadcasting Group (MBG) in 2014, Nexstar Broadcasting Inc. (Nexstar) has actively worked to undermine MBG and its stations, according to the lawsuit in the Supreme Court of the State of New York this morning. The suit seeks to make MBG whole from Nexstar’s disingenuous and damaging actions – bringing to light Nexstar’s effort to sabotage MBG’s business and eventually buy back the stations for pennies on the dollar.

In 2014 Nexstar sold three stations (KPEJ-TV, KMSS-TV, KLJB-TV) to MBG. Nexstar was forced to sell the stations due to Federal Communications Commission (FCC) regulations and chose MBG as a buyer, believing that the FCC would look favorably upon MBG’s status as a minority-owned business. While the FCC was led to believe that the sale would further the commission’s objective of increasing ethnic diversity in ownership of broadcast stations, as soon as the arrangement was inked Nexstar sought to sabotage and undermine MBG’s operations to decrease its worth.

“It has become clear that our only value to Nexstar was diversity optics at the FCC,” said MBG president and CEO Pluria Marshall Jr. “Ever since the deal was signed, Nexstar has gone to great lengths to constantly interfere, undercut our authority and sabotage our business, with little regard for the agreements in place with us or the FCC.”

Despite the FCC’s mandate to make the public airwaves available to all citizens without regard for “race, color, religion, national origin, or sex,” the U.S. broadcast industry suffers from a pitiable shortage of minority owners. As of today, only 12 out of 1,400 full-power, commercial TV stations are black-owned – less than one percent. Since MBG owns 3 of the 12stations, Nexstar’s efforts to push MBG out of business would remove 25 percent of the black-owned stations on the air today.

“Nexstar’s bait and switch flies in the face of the FCC’s quest for diversity in ownership. If allowed to go unchecked, it could affect ALL minority owned businesses in the telecommunications space,” said Dr. Benjamin F. Chavis Jr., President & CEO, National Newspaper Publishers Association (NNPA). “This behavior is a road map on how to use minority-owned businesses for companies’ own gain and squash diverse programming once the ink on the deal is dry,” continued Chavis. “Failing to act will embolden companies to go after the handful of remaining minority-owned stations and scare away prospective minority owners.”

During negotiations, the FCC expressed concerns that the transaction would leave Nexstar with too much influence over the MBG assets. As such the deal was only approved after Nexstar stated that “MBG shall maintain full control, supervision and direction of” the stations, including the stations’ “management, programming, finances, editorial policies, personnel, facilities and compliance with the FCC Rules and Regulations.”

Contrary to these provisions, and the FCC’s requirements, Nexstar has continuously hampered MBG’s ability to operate its stations independently by:

Consistently interfering in MBG’s sales and operations in defiance of FCC directives and commitment to Congress for diverse programming.

Overcharging for its stations at the outset, presenting MBG with a price tag of $58.6 million for the same stations and assets that it intended to sell to another potential buyer for only $42.3 million.

Trying to drive MBG out of business by attempting to cause MBG to default on its credit facility. As part of obtaining FCC approval, Nexstar agreed to guarantee MBG’s credit facility for 5 years. Nexstar, however, attempted to withdraw its guarantee after 3 and a half years. Nexstar knew that MBG was in no position to refinance its debt without Nexstar’s guarantee. Only after MBG threatened litigation did Nexstar abide by its contractual obligations.

In addition to explaining how Nexstar undermined MBG, the lawsuit outlines MBG’s efforts to work in good faith with Nexstar to try and resolve the behaviors in question and create a strong and prosperous partnership between the two companies. The filing makes clear that the commitment to resolving the issues was not mutual. As such, MBG decided that the only appropriate recourse was through the legal system.

The Federal Communications Commission (“FCC”) has an admirable and often-stated goal of increasing ethnic diversity in ownership of broadcast stations and ensuring that a broad diversity of voices and viewpoints are delivered on the public airwaves.

Nexstar pretended to support this objective by partnering with Marshall Broadcasting Group (“MBG”) to obtain FCC approval for a transaction, but as soon as the deal was done, it purposefully worked to undermine MBG.

This “bait and switch” flies in the face of the FCC’s quest for diversity in ownership and programming and is a dangerous precedent that could affect ALL minority-owned businesses in the telecommunications space.

Sabotage was the Plan All Along

From day one, Nexstar set out to use MBG’s minority-ownership status to obtain FCC approval of a larger transaction and then drive MBG out of business so that it could obtain MBG’s stations for pennies on the dollar.

Working to drive MBG out of business by attempting to cause the company to default on its credit facility.

Consistently interfering in MBG’s sales and programming operations, in direct violation of FCC directives and mandates.

Nexstar’s Point of View

Nexstar wants to avoid discussing its bait and switch before the FCC.

On the day MBG’s acquisition of its stations was announced, Nexstar lauded the partnership as “a model to increase media ownership diversity and minority-oriented programming” and MBG’s owner as “having the background and skills necessary to serve local interests while maintaining independent operations and programming decisions for the stations.”

Once the deal was signed, however, Nexstar’s behavior was controlling and punitive – even forcing MBG to sell off real estate assets to keep itself afloat.

The Lawsuit–Disregard for Contractual Obligations

MBG clearly sees now that its minority-ownership status was used by Nexstar to get a deal done with the FCC. In short, MBG was good for the “diversity optics,” but of little use to Nexstar once the deal was completed. After years of flagrant breaches of agreements and punitive behavior from Nexstar, MBG has filed suit to be made whole.

The Broader Story: It Can Happen to You

Every minority business owner should hear about this story – it is about so much more than some company not playing fair. Nexstar’s behavior provides a dangerous road map for other companies to take advantage of ethnic, women, and veteran-owned businesses in any industry. Not only does it show companies how to use minority-owned businesses to gain tax benefits and increased profits, but shows how to squash those minority-own businesses once the ink on the deal is dry.

The FCC’s Prime Objective of Promoting Diversity and Localism at Stake

The number of black-owned full powered, commercial TV stations in the US represents not much more than an embarrassing statistical rounding error. If Nexstar’s behavior is allowed to go unchecked, the FCC’s goal of promoting diversity in ownership and programming would be at greater risk than it is currently.

MBG clearly sees now that its minority-ownership status was used by Nexstar to get a deal done with the FCC.In short, MBG was good for the “diversity optics,” but of little use to Nexstar once the deal was completed.After years of flagrant breaches of agreements and punitive behavior from Nexstar, MBG has filed suit to be made whole.

Every minority business owner should hear about this story – it is about so much more than some company not playing fair.Nexstar’s behavior provides a dangerous road map for other companies to take advantage of ethnic, women, and veteran-owned businesses in any industry. Not only does it show companies how to use minority-owned businesses to gain tax benefits and increased profits, but shows how to squash those minority-own businesses once the ink on the deal is dry.

The FCC’s Prime Objective of Promoting Diversity and Localism at Stake

The number of black-owned full powered, commercial TV stations in the US represents not much more than an embarrassing statistical rounding error.If Nexstar’s behavior is allowed to go unchecked, the FCC’s goal of promoting diversity in ownership and programming would be at greater risk than it is currently.